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More explanations of virtual currencies and possible applications

Several recent articles provide more background on Bitcoin and other blockchain tools. For your daily brain stretching:

Blockchain as a possible tool for fast and cheap international payments

China is working to restrict blockchain transactions

Central banks ponder issuing of their own virtual currencies

Tax status of blockchain transactions and the IRS is out fishing for tax evaders

Description of blockchain as being the internet of money, comparable to how the internet moves and stores information

8/28/17 – Journal of Accountancy – Blockchain opens new era for cross-border payments– Moving money from one country to another is time-consuming and costly. There are fees at both ends. It takes several days for the money to arrive. An error in one digit of the routing or account information means the transfer will go astray and take more time and money to locate.

Blockchain offers the opportunity to make international transfers near immediate and at a fraction of the cost.

For an illustration, picture a company paying international vendors. Or an international worker sending part of his paycheck back to his parents in his home country. Or a mission organization moving funds to its many field offices.

The widespread use of blockchain for international payments is still in the ‘aspirational’ phase. It will take time for systems to get in place and then to gain acceptance. Gary Boomer, a tech consultant likely familiar to readers of this blog, thinks it will be 2020 before the systems reach critical mass and 2025 before they gain wide acceptance.

The first step is to shut down exchanges in the country. That closes off many access points.

The next step will be to ban connections outside the country to the web sites of currency traders. Even those traders are themselves outside the reach of the Chinese authorities, without an internet connection, citizens in the country won’t be able to trade virtual currencies.

And don’t starting thinking of a VPN to get outside the country and then jump to a trader. VPNs are heavily regulated and restricted.

Apparently a lot of the bitcoin trading and a large portion of the mining is from China.

A comment in the article from the government regulators says the goal is for every financial transaction in the country to be traceable. Just to be clear, that means traceable by the government.

9/18/17 – Wall Street Journal – Biting Back on Bitcoin, Central Banks Chew Over Introducing Cryptocurrencies – The Bank for International Settlements, a consortium of central banks (a trade group?), suggested that central banks should think about setting up their own virtual currency in order to counter the rapid growth of bitcoin and other crypocurrencies. (How’s that for an agenda laden description of virtual currencies?)

I think the main goal of doing so is that would allow central banks to maintain control over the money supply. At a minimum, it seems to me that would allow central banks to at least monitor and measure the money in the virtual world. The alternative would be for the central banks to not know anything of what is happening in all those trading markets.

My little bity brain can’t quite grasp the idea of a central bank’s virtual currency replacing any of the private ones, or even coming close in terms of size or volume or value of transactions. On the other hand, I’m writing these posts to stretch my little bity brain.

9/25/17 – The CPA Journal – Digital Currency: Market Value of Bitcoin, Ethereum, and Litecoin– The IRS has taken the position that virtual currencies are property, not currency. This has a number of implications. First the fair value of virtual currencies received as payment for good or service is income and must be reported. Fair value calculation is as of the date of the transaction.

Second, think through the idea that things like Bitcoins are property instead of currency – setting a value at date of transaction create basis, which means when the virtual currencies are spent there is a gain or loss. The gain will be ordinary or capital depending on what you’re doing with the currency.

With something in the range of 300,000 transactions a day in the Bitcoin world alone, the IRS has logically concluded there should be a large number of people reporting capital gains. Their research has shown only 900 people reported a taxable capital gain. That has led the IRS to conclude that there’s a whole bunch of underreporting.

Article says the next step the IRS is taking is to issue a “John Doe Summons” to Coinbase seeking the identity of their customers. The goal is to search for taxpayers who have not been reporting gains.

Tax geeks can read the article for the reasoning for the John Doe Summons, background on that strategy’s success in search for tax-evaded assets in Switzerland, defenses against the summons, likely next steps, and ideas on how those who are non-compliant can get compliant.

For everyone else, the article points out the IRS is looking for tax evaders in the virtual currency worlds. A word to the wise.

9/22/17 – Wall Street Journal – The Blockchain Is the Internet of Money – A Silicon Valley entrepreneur who is an advocate for virtual currency suffered through his 13 year sentence of K-12 education, saying he learned little from his time in the educational archipelago (play off the phrase gulag archipelago is intentional).

After repeatedly getting in trouble for aggressively defending himself when he routinely got picked on and beat up by his classmates, he learned that the system and authorities are against anyone who doesn’t comply or follow along.

Lest you dismiss him as an uneducated nut, consider that he earned an electrical engineering doctorate from Stanford, started and successfully sold a medical tech company, and was on the shortlist to lead the FDA for the new administration before withdrawing his name from consideration.

That bad experience in education and his learned scepticism of official authority point to why he believes Blockchain is such a liberating technology.

He says reports in Gawker trashing him were fake news. He also pointed out that Gawker is dead after losing the revenge porn lawsuit while at the same time one unit of Bitcoin goes for $4000.

Amongst a long list of other ideas in explaining Blockchain, he points out that the financial crisis of 2008 highlight the need to move financial transactions outside of formal banks.

He also discusses the crackdown by China over Bitcoin and other virtual currencies. He points out that many of the people at the senior level in the Chinese government are engineers, so they actually understand technology. His guess is the crackdown on virtual currencies is an effort to bring the market under their control, comparable to what was done after the so-called Great Firewall was installed. One guess on how it could turn out is developing another virtual currency issued and mined in China for transactions in the country. Call it the Chinacoin.

If you’ve actually been reading my feeble attempts to explain blockchain, you will enjoy the educational detail in the article.